Nvidia’s ‘structural challenge’ is return on its own investments

Nvidia (NVDA) will execute a 10-for-1 stock split after the market close, making the stock more affordable to investors. Bernstein Managing Director and Senior Analyst Stacy Rasgon joins Market Domination to discuss how the split will impact the company and break down any potential headwinds that lay ahead.

“For a lot of these stocks, there is increasingly a retail presence … but to be honest, I think it’s at the margin. I’m not really factoring in very, very much. There’s plenty of liquidity in the stock anyways. We don’t need the retail investors to drive it higher,” Rasgon explains. He believes the split will leave the stock largely unchanged, and notes that the company has executed stock splits before.

Rasgon believes that the shares remain inexpensive relative to the company’s growth. He points to its Blackwell chips and new Rubin chips as key areas of success for Nvidia as the AI race heats up. However, he warns, “As we as we get closer to earnings and other things, how high do expectations go into those prints? And then what do things look like relative to those expectations? That’ll be the worry for the next few quarters.”

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This post was written by Melanie Riehl

Video Transcript

Invading shares are about to become more affordable, at least if you want to buy a share versus a fraction of a share.

The tech giant will complete its highly anticipated 10 for one stock split where investors will receive nine additional shares after the market closed, the stock is going to begin trading at the split adjusted price on Monday, June 10th.

Joining us now, Stacy Rask and managing director and senior analyst, Stacy.

Great to see you as always.

So how, you know, I know that you like to look at the fundamentals of this company.

Um And there’s a lot to say about that, but before we talk about that, let’s let’s talk about the split and whether you are also factoring this in as a potential catalyst.

So fundamentally, it should mean nothing as we know in practice, you know, there is a, I guess for a lot of these stocks, there is increasingly a retail presence and to the extent that it makes it more attractive for retail.

I mean, maybe, but I mean, to be honest, I I think it’s at the margin, I’m not really factoring in very, very much.

There’s plenty of liquidity in the stock anyways.

We don’t need the retail investors to drive it higher.

Um, it’s not the first time they’ve done a split either, by the way, they did a four for one, not that long ago, maybe a couple of years ago and splits in their history.

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But, I mean, I mean, they, they, it wasn’t that long ago and the stock and the stock went up after that, but you could argue that was, uh you know, because the company was growing.

Um I’m just curious, just this is just for my own, you and, and your other cohort of analysts.

So how does this work as of Monday?

Do you come out with another note?

And your new price target is just 1/10 of what it has been.

Actually in practice, they will um handle like on the back end, they’ll handle, they’ll cut my earnings presumably by, by a factor of 10 and the target price by a factor of 10.

The next time I publish a model, I will publish a corrected one and, and the only impact there is I’ll, I’ll increase my share count by 10 X which would reduce my eps by 10 X.

But it all, it all scales like it’s fine.

I don’t have to do very much except change one line in the model next time I publish the actual model.

That’s all, you know, it’s fascinating to me is that, as you note in one of your reports, the shares remain relatively inexpensive, looking at a 35 times for earnings multiple.

Um anything you see changing that, uh not yet.

I mean, 11 of the, you know, to the extent that there are bear pieces on this stock, I mean, people are worried about, you know, air pockets, uh you know, capex digestion, that sort of thing.

I think going into their last earnings, that was a worry, they’ve got a product transition from the current generation, which is called Hopper to the next generation, which is Blackwell and people I think were worried about some kind of an air pocket in front of that transition.

And the company kind of took that off the table, I think on, on the, on the print itself, um, at this point, I mean, look at, at some point maybe we’ll see something like that, but it definitely does not seem like it’s now like numbers this year look really good.

My guess numbers next year are gonna be fine as well.

They probably go up and I mean, I guess calendar 2026 I guess we’ll worry about that when we get closer.

But, but it, it, it ain’t the time to worry now.

I mean, and if you look at the out years and you look at what the revenue estimates are, for example, I mean, the numbers are gonna get smaller in terms of the, the magnitude of growth and growth or or are they, are they, are we?

Right.

I mean, like, um, so, so what’s, uh, uh, well, and I’m just curious, you know, when you hear, of course we’ve got Hopper, we got Blackwell.

Now we got something called Ruben coming down the pike.

At what time?

At what point do you think there’s this risk here of, you know, the, the relentless need to offer more and eventually disappoint in the market?

Well, I, I mean, who knows?

Right.

Look, II, I think you’re asking a slightly different question like when, when, when does this all come to a head, if it comes to a head?

And like, you know, we, we can argue about cyclical air pockets like digestion and that like that, that’s fine.

It’ll probably happen at some point.

That’s not structural.

I think the structural worry would be, you know, over the long term, like there’s a lot of money that’s getting spent and there has to be a return on that investment, either driving revenues for, for customers or driving efficiencies and saving costs.

Ideally both.

And if it were to turn out that given the amount of money that’s being invested, that the returns just don’t justify it, then the whole thing would presumably come crumbling down.

I mean, for NVIDIA frankly, for lots of other folks, right.

So I think that would be like the long term structural worry if you’re worried about this, this kind of rolling over like, like permanently.

I personally don’t believe that’s the case.

I do think that there are use cases here.

I do think that I think companies are already starting to generate returns are starting to build business models.

We’re, we’re still early, clearly, we’re still early.

Um, but I don’t worry too much about it, but I mean, to the extent that you are worried about some sort of structural issue that would probably be it.

But again, it, it’s not, now it will be, you know, we, we’ve got a few years of investment to come before we, we come to that conclusion one way or the other.

So what are the shorter term consider or, or concerns that you might have over the next couple of quarters with regard to the stock?

Yeah.

Look, I, I think the, the numbers should be fine.

I mean, numbers should go up probably.

I mean, the question is, is, you know, how is that relative to expectations?

Like sometimes you see stocks beat numbers and yet the stock itself goes down and that’s because what really matters is not so much my numbers or my competitors numbers.

It, it’s the, the actual buy side, the investors numbers which tend to be higher typically than, than, than the Wall Street analyst that you sort of see on, on, on the screen.

Um, for now though, like I said, I suspect numbers probably more likely have an upward bias than a downward bias.

I, I’m not really worried about any kind of, you know, like I said, near term air pocket on their call.

Also, they kind of suggested that the Blackwell, which is their next generation, the Blackwell ramp is, is ramping earlier than, than people thought.

Uh I think in the near term things look pretty good.

The question will just become as we, as we get closer to earnings and other things, how high do expectations go into those prints?

And then like, what do things look like relative to those expectations?

That’ll, that’ll be the worry for the next few quarters, but the raw numbers themselves, I think should be fine at this point.